Urea retail price: Negative for nitrogenous fertilizer producers

By Xun Yao Chen
•
Sep 9, 2013 3:15 pm EST

The significance of retail urea price

While wholesale prices affect producers’ revenues, analysts use retail urea price to assess how expensive nitrogenous fertilizers are to farmers. Because farmers are also concerned about making profits, fertilizer prices can alter farmers’ purchase behavior. When fertilizers becomes cheaper, farmers will buy more. But when fertilizer prices become more expensive, they can deter purchases.

Retail urea price entering waterfall decline

On August 30, U.S. urea retail price stood at $543 per metric tonne, which is a decline from $550 per metric tonne since August 23. Persistently high corn prices in the United States could have been the reason that supported relatively high prices, while prices for wholesale ammonia (a nitrogenous fertilizer used to make urea) have fallen by more than ~20% since the beginning of the year.

In its recent earnings call, Agrium Inc. (AGU), North America’s largest farm retail supplier, expected solid demand for the second half of this year due to “positive grower sentiment, strong nutrient removal this year and the affordability of crop nutrients.” But the company’s comments remain questionable since corn prices have fallen ~30% this year due to a record production outlook. Plus, increased supply of urea from China will also add downward pressure on prices. This means retail fertilizer prices could fall further throughout the rest of the year.

Impact on several fertilizer companies

Even if farmers purchase more fertilizers, as the retail price of urea falls, the net impact will likely be negative. Besides, demand for nitrogenous fertilizers is less price-sensitive to other fertilizers such as potash and phosphate.

While relatively strong U.S. retail urea prices have supported Agrium Inc. (AGU) during the second quarter, it’s more likely than not that these prices will have to come down for the remainder of this year. This will negatively impact Agrium’s earnings more than other nitrogenous fertilizer producers, like CF Industries Inc. (CF), Terra Nitrogen Company LP (TNH), and Potash Corp. (POT), that only sell their products at wholesale prices.

Yet it’s also important to know that CF Industries Inc. (CF) received favorable pricing for its fertilizers because of early orders. This means if retail prices were to fall more, they could pressure prices that wholesale producers can sell at as well. The VanEck Vectors Agribusiness ETF (MOO) will also be negatively affected.